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Friday, December 4, 2009

How to Initiate a Performance Framework in Budgeting

Performance of fiscal policy and budget management vital for Public Financial Management

Performance Budgeting is a modern management tool and not a panacea for all evils – it is the way to go forward for public sector efficiency and performance

Pokar Khemani of the International Monetary Fund described the benefits of a performance framework in Public Financial Management at the ICGFM Winter Conference held at the Inter-American Development Bank in Washington DC. There is an increasing demand for government accountability, transparency and effectiveness, according to Mr. Khemani. This generates a need for improved government services and responsiveness from politicians and public officials. He pointed out that the financial crisis created a demand for the improved performance of the budget

Mr. Khemani identified the three goals for the performance of budget management that are closely interwoven:
  • Macroeconomic stability and aggregate fiscal discipline
  • Allocation of resources to the strategic priorities – expressed by the society
  • Efficiency in the use of resources in the implementation of government policies

Mr. Khemani described the evolution of performance frameworks in budgeting around the world. Many frameworks were developed during financial crisis. There has been widespread interest in Eastern Europe, Latin America, Asia and Africa. Performance budgeting in government is a world wide movement according to Mr. Khemani.

Mr. Khemani suggests that performance budgeting begins with the fiscal framework. Other prerequisites include:

  • Credible macroeconomic framework
  • Integration of budgeting and planning
  • Well developed budget preparation process
  • Sound budget execution, accounting and reporting
  • Strong PFM legal framework
  • Clarity on budget roles of legislature and executive

Mr. Khemani warns that modernization, whether performance budgeting or accrual, can only succeed when the basics are working well. Budgets must be credible. He introduced the key tasks needed for a performance framework in government budgeting. He warned that governments need to be very clear about why reforms are being introduced. A performance framework is not a machine that can be easily implemented.

Traditional budgets are based largely on line items while program budgets have well-defined outputs and outcomes. Mr. Khemani pointed out that it is not a good practice to focus at the detail line items for budgets but rather at the aggregate level. He described the programmatic approach to budgeting, although he conceded that there are different approaches.

Mr. Khemani described good practices in program classifications: program, sub-program and activities. Programs should include both current and capital budgets. He suggested that inter-ministerial programs should not stretch over several ministries because accountability needs to be established at the level of sub-programs and activities. The chart of accounts (COA) needs to be revised to be fully consistent with the revised budget classification structure. He described the "sad story" of countries that budget based on program but cannot execute based on program. The program segment was missing in the COA and the financial management software was not enhanced to support this need. He warned that treating payroll cost as a single line item prevents governments from learning what the true cost of programs.

Common issues in creating performance specifications include mixing output and outcome indicators, and having too many performance targets. Performance measurements should be "SMART":

  • Specific – What is the most critical success factor(s)?
  • Measured – What are the quantifiable characteristics?
  • Achievable – Can you improve on past performance?
  • Relevant – Do clients think the target is most important?
  • Timed – How quickly can it be achieved? How long will it take to respond to needs?

Mr. Khemani showed good and poor practice examples in creating indicators and targets. He recommends the improvement of monitor and review systems. Comprehensive spending reviews from the UK, Program Assessment Rating Tool (PART) in the US and Management Resources Results Structure (MRRS) from Canada were introduced as examples of program evaluation. He warned that "business as usual" will not enable governments to improve performance.

A credible Medium Term Expenditure Framework (MTEF) could facilitate linking resources to policy objectives and performance because multi-year spending allocations can be tied with multi-year performance targets according to Mr. Khemani.

Mr. Khemani suggests that the introduction of Performance Based Budgeting (PBB) takes time, in the 4-5 year range. He suggests that reform needs widespread political support and intellectual acceptance and should be linked with wider reforms. This reform requires flexibility to enable public finance managers to improve performance. Managers cannot be expected to be held accountable if they do not have discretion in decision-making. Empowering managers is not about removing controls but devolving the responsibility for applying some of them – the Ministry of Finance needs to monitor effectiveness of financial management.

In concluding, Mr. Khemani recommended the staged approach to implementing performance frameworks in government

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